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Advantages and Disadvantages of Using your Savings for Opening a Business

You have already taken the first step! Starting a business will change your life in every aspect, not only financially. It changes your schedule, your habits, and even your way of thinking. It makes you value every penny and every dollar, as well as the effort it takes to earn them.

Accessing capital to start the entrepreneurial journey is one of the main challenges. Fortunately, the range of investment and financing alternatives is growing. However, the most widely used due to the advantages they offer continue to be personal savings and friends and family loans.

62% of entrepreneurs in the United States use their savings to face the economic problems of their companies, according to data from the Small Business Credit Survey 2021.

Doing so allows them greater freedom in deciding the growth path for their company, but it also brings many limitations, such as the lack of financial support and advice. Unfortunately, this is not a possibility for most people. 69% of Americans have less than $1,000 in their savings account, according to information from GoBankingRates.

In the absence of these resources, using financing products such as commercial loans, lines of credit, or small business grants to start a business is the most viable alternative for entrepreneurs to achieve the venture of their dreams, improve their income and reach their personal, professional goals.

How much savings do you need to start a business?

According to information compiled by Business News Daily, starting a micro-business costs $3,000, while most home-based franchises cost $2,000 to $5,000. But the initial investment is not everything, Shopify conducted a study, and the results indicate that small business owners spend an average of $40,000 during the first year of operation.

Advantages and disadvantages of using your savings

There is no methodology for choosing capital, each business is unique, and not necessarily the option that worked for your neighbor will also work for you. Remember that the best way to finance a business is the one you can get. Here are the advantages and disadvantages of using your resources.

1-.Advantages

– No interest rates: Personal savings will avoid the payment of interest rates and fees for the use of any financing product. 

– Greater control: From the financial projection, you will be aware of the capital you have; therefore, it will be impossible to exceed the assigned budget. 

– Complete ownership of the business: All income generated by your business will go directly to the company’s bank accounts without having to pay any financing or share profits with other investors.

2-. Disadvantages

– Risk of decapitalization or bankruptcy: If a business does not work or does not have the expected results, the owner may lose all his capital in just a few months. The only possibility left will be to resort to small business grants, which usually have requirements that are difficult to meet.

– The business does not generate credit history: By not applying for specialized business financing products. Lack of credit history will close the door to more significant financing opportunities for company expansion.

– Longer time to grow: Using personal savings to start a business will limit the company’s growth to a set budget, which will mean more time for the industry to reach its break-even point and profitability.

Other financial options to start a business

In addition to personal savings, there are other sources of funding for a new business. Commercial loans, lines of credit, commercial bank cards, working capital loans are just tools that entrepreneurs can use to establish their businesses.

If you are part of a minority, you can also apply for small business grants for minorities. To get these resources will be necessary to have a bulletproof business plan to pass the various filters that the institutions that grant them.

Starting a business is not only a matter of generating a savings fund to later use in establishing the company. The real challenge is using capital wisely, thinking ahead, and using financing products to generate credit history. This way, if the business takes off and becomes scalable, you will not have to wait so many years to generate another savings fund.

Do not put your inheritance at risk; financing is the best ally for the development and growth of a company, use financial products in an orderly manner and get better results in less time.

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